Looking ahead in 2012 can be quite challenging given these macro issues- the Washington gridlock, European debt crisis, Middle East tensions and uncertainties about the Chinese economy. It is important to diversify and stay flexible. At the present time, based on the fixed income futures markets, I am expecting the following:
- Short term interest rates will remain low throughout the year.
- Longer term interest rates will likely have a small upward bias.
- Equity markets will likely “muddle through” with a single digit return.
- Some fixed income sectors with outstanding double-digit performance in 2011 (e.g. Treasuries, municipals), will likely stabilize and produce mid single digit total returns.
Given the above view, senior loan closed-end funds seem to offer good prospects for 2012, and it may be worthwhile to re-allocate some profits from US Treasuries and municipal bonds into the senior loan asset class.
- Senior loan CEFs offer high, stable dividends in the 6-7% range. They hold fairly large positions in floored Libor floaters, where you get a minimum floor interest rate if the Libor rate stays low, but increasing coupon payments if/when Libor exceeds the floor rate.
- The funds are currently available at discounts to net asset value. A narrowing discount would add to the total return.
- Attractive leverage
- Defaults should be fairly low in a “muddle through” economy as long as we avoid recession.
- Senior loan CEFs have low duration, so their prices should hold up pretty well even if interest rates started rising before the end of 2012.
Here are four CEF selections which look fairly attractive now:
- INVESCO Van Kampen Senior Income Trust (VVR)
The fund seeks high current income with capital preservation through investment in floating and variable rate senior loans.
- Yield= 6.46% Leverage: 30% Expense Ratio= 1.72%
- Discount to NAV= -6.07%
- 1 year Avg. Discount= -2.85%
- Default Rate (last 12 months) = 0.00
- ING Prime Rate Trust (PPR)
The fund seeks high current income with capital preservation through investment in US dollar denominated, floating rate secured senior loans.
- Yield= 6.53% Leverage= 30% Expense Ratio= 1.59%
- Discount to NAV= -5.83%
- 1 year Avg. Discount= -2.58%
- Default rate not available.
3. INVESCO VK Dynamic Credit Opportunities (VTA)
Leveraged CEF seeks a high level of current income by investing primarily in senior bank loans.
- Yield= 8.26% Leverage: 30% Expense Ratio= 1.78%
- Discount to NAV= -8.48%
- 1 year Avg. Discount= -5.97%
- Default Rate (last 12 months) = 2.13%
4. Eaton Vance Floating Rate Income Trust (EFT)
Leveraged closed-end fund invested in senior secured floating rate loans seeks to provide a high level of current income with preservation of capital. The fund provides individual investors access to the institutional loan market.
- Yield= 6.95% Leverage= 35% Expense Ratio= 1.20%
- Discount to NAV= -3.61%
- 1 year Avg. Discount= =+0.11% (premium)
- Default rate not available.